Internap Network Services Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: Internap Network (INAP)

Internap Network Services (NASDAQ:INAP)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET


Michael Nelson

J. Eric Cooney - Chief Executive Officer, President and Director

Kevin Mark Dotts - Chief Financial Officer


Mark Kelleher - Dougherty & Company LLC, Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division

Christopher M. Larsen - Piper Jaffray Companies, Research Division

James T. Dobson - The Benchmark Company, LLC, Research Division


Good day, ladies and gentlemen, and welcome to the Internap Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host for today, Mr. Michael Nelson, Director of Investor Relations. Sir, you may begin.

Michael Nelson

Good afternoon, and thank you for joining us today. I'm joined by Eric Cooney, our Chief Executive Officer; and Kevin Dotts, our Chief Financial Officer. Following prepared remarks, we will open up the call for your questions.

The slides we reference in the call are available on our website, in the Presentations section on the Investor Relations page. Non-GAAP reconciliations and our supplemental data sheet, which includes additional operational and financial metrics, are available under the Financial Information Quarterly Results section of our Investor Relations page.

Today's call contains forward-looking statements, including expectations regarding future performance and the drivers for long-term profitable growth; belief in our business strategy, including the benefits we expect to achieve from investing in company-controlled colocation, hosting and cloud services; timing for bringing new data centers online, demand within those markets and expectations regarding capacity; expectations regarding cash flow, levels of capital expenditures and our capital deployment and flexibility. Because these statements are not guarantees of future performance and involve risks and uncertainties, important factors could cause our actual results to differ materially from those in the forward-looking statements. We discuss these factors in our filings with the Securities and Exchange Commission. We undertake no obligation to amend, update or clarify these statements.

In addition to reviewing the third quarter 2012 results, we will also discuss recent developments.

Now, let me call the turn over -- call -- turn the call over to Eric Cooney.

J. Eric Cooney

Thank you, Michael, and good afternoon, everyone. We're pleased you could join us for our third quarter 2012 earnings presentation. I will start the discussion with a summary of our results and then turn the call over to Kevin Dotts, our Chief Financial Officer, to take you through our detailed financial results. From there, I will briefly wrap up our prepared remarks, and then we will open up the call to take your questions.

So moving on to Slide 3. You will see we delivered total revenue for the quarter of $68.1 million, representing an increase of 10% year-over-year and a decline of 1% over the second quarter of 2012.

Consistent with our company's strategic plan, we continue to deliver growth from our core data center services business, including company-controlled data centers, hosting and cloud services. We see the proportion of our revenue mix represented by our data center services business continuing to increase.

However, the data center services growth was offset by a revenue decline in our IP services business, which we'll come back to on the next slide.

Segment profit of $34.6 million increased 11% year-over-year and declined 4% sequentially. Segment margin was 50.7%, an increase of 30 basis points year-over-year and a decline of 180 basis points quarter-over-quarter.

The primary driver for the sequential reduction in segment profit and margin was the lower IP revenue, but was also influenced by higher seasonal power costs during the third quarter.

On Slide 4, you can see the sources of change in revenue from the second quarter to the third quarter of 2012. Our core data center services, including company-controlled colocation, hosting and cloud services, remain the engine for top line company growth. As compared to the second quarter, lower non-recurring IP equipment sales and softening IP transit sales resulted in a decline in IP services revenue.

In total, the data center services unit contributed $0.6 million of incremental revenue, offset by a sequential decline in IP services revenue of $1.2 million in the third quarter.

Turning to Slide 5. We delivered a solid quarter of adjusted EBITDA, which totaled $12.5 million or 18.3% of revenue. This represented an 11% year-over-year increase and 2% increase sequentially. The year-over-year improvement was predominantly the result of revenue and segment profit growth in data center services and operating leverage in the business model.

Cash operating expenses declined $1.8 million sequentially, due to a combination of both ongoing operational improvements and the elimination of certain non-recurring expenses incurred in the second quarter, such as recruiting fees.

Moving on to Slide 6. Data center services revenue totaled $42.1 million for the quarter, an increase of 24% year-over-year and 2% sequentially. Data center segment profit was up strongly from a year ago, rising 36% year-over-year and declining 1% sequentially. The solid year-over-year increase was driven by the improved product mix shift away from partner data centers and increasingly from company-controlled data centers, as well as hosting and cloud services revenue.

Higher seasonal power costs impacted margin sequentially as we experienced a particularly hot summer, which placed a significant incremental load on the data center cooling infrastructure.

IP services revenue decreased year-over-year and sequentially to $26 million. IP segment margin decreased 190 basis points sequentially to 61.4%, primarily due to lower non-recurring IP equipment sales.

Despite the revenue headwind created by the declining IP services revenue, the segment is a key element of competitive differentiation for the data center services business and continues to deliver solid segment profitability and cash flow, which we leveraged to invest in the more capital-intensive data center services segment.

On Slide 7, I'd like to provide more color on the positive trends we are seeing in the data center services segment, which we expect to remain Internap's primary growth driver moving forward.

Our core data center services, which we define as company-controlled colocation, hosting and cloud services revenue, remain the engine for long-term growth both in revenue and profitability. Revenue from these core data center services has increased at a 20% 3-year compound annual growth rate through the third quarter of 2012. Core data center services now represent 68% of total data center revenue as compared to less than 50% in the third quarter of 2009.

Turning to Slide 8, today we announced our intention to expand our footprint in the New York Metro Area to meet customer demand as our current facilities reach full utilization. We will construct a new premium company-controlled data center in Secaucus, New Jersey, which we expect to be operational in the fourth quarter of 2013. This new facility will be our 12th company-controlled facility across 8 North American markets, and reflects continued strong demand for our core data center services solutions in the New York Metro market.

The new Secaucus data center will add 55,000 net sellable square feet to the market when fully deployed. This represents a significant expansion of our existing New York Metro footprint where we currently operate approximately 30,000 net sellable square feet across 2 facilities.

Turning to Slide 9. We thought it would be helpful given the significant expansion of our product portfolio to provide a brief overview of the scope of Internap's IT Infrastructure service offering today. Starting at the bottom of the graphic, you see Internap's origins with high-performance networking solutions that leverage our proprietary technologies to enhance the performance of our customers' applications and to do so on a highly reliable infrastructure.

Next up the stack, you see our premium data center, from which we offer the range of services spanning colocation, hosting and cloud services. It's appropriate to think of these 2 layers, the network and the data center, as the foundational elements of our portfolio of high-performance IP services.

At the top of the stack, we're representing 2 types of hosting solutions, our Agile Hosting and our custom hosting offerings, both of which are delivered from within our premium data centers, utilizing our high-performance network.

The Agile Hosting offering is engineered for customers typically seeking speed of deployment, scalability, on-demand usage and self-provisioning capability. These solutions are all API driven and are ideal for supporting rapid scale-out applications.

Our custom hosting solutions on the other hand, are tailored to meet very specific customer application workload requirements.

The choice for our customer between Agile and custom hosting is typically quite clear. If I'm interested in standard off-the-shelf IT products, that I can provision quickly and scale dynamically, then Agile is likely the right solution. If my IT requirements are quite unique or tailored and speed of deployment and automatic scalability are not the top priorities, then a custom hosting solution is likely the better fit.

Finally, you can see that we offer hybridization capability across our colocation and hosting services to provide customers the ultimate flexibility to build and deploy applications into the optimal combination of infrastructures that best meets their requirements.

On Slide 10, we tip this cube forward to give you a bit more granularity on our Agile and custom hosting solutions. The horizontal axis remains a split between Agile and custom, really a split between automation and customization. Now you can see the vertical axis, which further divides each of the Agile and custom hosting solutions into physical and virtual offerings.

On the left side of the slide, you see our Agile Hosting platform divided into a public cloud compute and storage offering and a dedicated physical offering. For both flavors, the Agile platform provides seamless management tools that allow the provisioning and scaling of both physical and virtual IT infrastructure.

Our Agile solution includes virtual and bare-metal configurations, provisioned in minutes and available by the hour, the month or the year. With built-in hybridization, we offer a seamless mix and match of physical and virtual servers to meet specific application requirements.

Our custom hosting solutions on the right side include private cloud and managed hosting services. With our private cloud solutions, we offer the levels of control and security inherent in a dedicated platform.

We believe this range of Agile hosting, custom hosting and colocation services, with the inherent hybridization capability, all underpinned by our performance network and data center offerings, is a compellingly unique market offering.

With a couple of recently announced awards, including the 2012 Cloud Computing Excellence Award and the Best Cloud Computing Service Award 2012, we think the market is beginning to take notice as well.

Moving to Slide 11, we announced today that we are providing scalable hosting, colocation and IP services to Vix Technology, a global provider of mobility and communications solutions. This is a good example of how Internap is successfully leveraging our best-in-class platform flexibility and performance to support companies that sit at the intersection of big data, mobility and Software-as-a-Service. Vix Technology required a low latency and scalable infrastructure that could process and deliver massive amounts of data with subsecond response times.

Our ability to provide better performance and support in a multisite environment has helped us tap into the expanding market of big data processing and support mobile and Saas application developers.

Now, let me pass the call over to Kevin Dotts, our Chief Financial Officer, who will give us a more detailed review of our financial results. Kevin?

Kevin Mark Dotts

Thanks, Eric. I'll start my comments on Slide 12, which covers our income statement comparisons. Third quarter 2012 revenue totaled $68.1 million, a $6.1 million increase compared to the same period last year, representing 10% year-over-year growth. Compared to the second quarter of 2012, total revenue declined by $0.6 million or 1%. The year-over-year increase was the result of higher core data center services revenue, while the sequential decline was largely the result of lower IP services revenue.

Total segment profit totaled $34.6 million, an increase of $3.4 million or 11% year-over-year and a decline of 4% sequentially. Total segment margin expanded 30 basis points year-over-year and contracted 180 basis points sequentially to 50.7%.

Total segment profit and segment margin were positively affected by solid growth in the data center services revenue and a larger mix of higher margin company-controlled colocation and hosting services. Lower IP, non-recurring equipment sales and higher seasonal power costs in our data centers impacted sequential comparisons in the third quarter.

Total cash operating expense of $22.1 million increased 11% year-over-year and declined 7% quarter-over-quarter. This sequential decrease was the result of several internal programs implemented to increase efficiency and to improve our cost structure such as improved collection procedures, which reduced bad debt expense, and increased pass-through taxes to account for higher municipal rates.

We expect the benefits to continue to accrue and believe the results highlight the positive operating leverage in the business model and our focus on cost containment to help drive operational performance.

Cash operating expense to revenue was 32.4%, roughly in line with the same period a year ago and down sequentially.

Adjusted EBITDA totaled $12.5 million, an increase of 11% year-over-year and 2% sequentially. Adjusted EBITDA margin was 18.3%, an expansion of 10 basis points year-over-year and 60 basis points sequentially.

GAAP net loss was approximately $2.5 million, an increase year-over-year and sequentially, primarily a result of higher interest expense and depreciation and amortization expense attributable to our capital investments.

Normalized net loss, which excludes the impact of stock-based compensation and certain items management considers nonrecurring, totaled roughly $1 million or $0.02 per share.

Cash flow and balance sheet summaries are shown on Slide 13. Capital expenditures outpaced adjusted EBITDA in the third quarter of 2012 by $12.6 million as we continued to invest in our company-controlled data center footprint. CapEx totaled $25.1 million as we completed the initial phase of our new data center build in Los Angeles and the expansion of our Atlanta facility.

Based on our year-to-date capital expenditures spend of roughly $65 million, we are updating our full year 2012 capital guidance to 70.7 -- $70 million to $75 million from $60 million to $70 million previously.

At the end of the third quarter, cash and cash equivalents totaled $26.4 million. Funded debt totaled roughly $88 million, an increase of roughly $16.5 million from June 30, 2012 as we amended our credit facility.

As of September 30, 2012, our long-term debt consisted of $65.8 million borrowed under our term loan and $22.3 million borrowed under our revolving credit facility.

Capital leases increased $1.9 million from the previous quarter to $49.5 million.

The third quarter total debt to last quarter annualized adjusted EBITDA was 2.8x, below the average of our data center peers.

Our announced data center expansion is fully funded with our current debt facilities, cash generation and cash-on-hand.

Day sales outstanding were 28 days in the third quarter, reflecting continued solid discipline in our collection procedures and prescreening credit policies.

On Slide 14, I'll cover segment results in more detail. Data center services revenues totaled $42.1 million in the quarter, an increase of $8 million year-over-year and $0.6 million sequentially.

Revenue growth in the core data center services more than offset a decline in partner colocation revenue and drove the 24% year-over-year and 2% quarter-over-quarter improvements. The improved mix from revenue generated at lower margin partner data centers to higher value company-controlled facilities and hosting services also helped drive strong year-over-year profitability growth.

Data center segment profit increased 36% year-over-year and declined 1% quarter-over-quarter. Higher seasonal power costs impacted the sequential change.

Revenue in our IP services segment totaled $26 million, down from the $27.9 million a year ago and from $27.2 million in the prior quarter. The year-over-year and sequential decrease was due to lower non-recurring IP equipment sales and softening IP transit bookings. IP segment margin declined to 61.4%, primarily due to the lower non-recurring IP equipment sales.

In the third quarter, churn in our data center segment increased 20 basis points sequentially and 40 basis points year-over-year, largely driven by disconnects within our partner facilities. Churn in our IP segment decreased 30 basis points sequentially and it was up approximately 10 basis points year-over-year to 1.4%. As a result, total company churn increased 10 basis points sequentially and 30 basis points year-over-year to 1.3%.

On Slide 15, as you can see, the available and occupied square footage trends in our company-controlled data centers. We have taken a disciplined approach to deploying capital towards expanding our company-controlled data centers.

In the third quarter, we successfully opened our new facility in Los Angeles and expanded our Atlanta facility. Today, we announced our intention to expand our footprint in the New York Metro Area to meet customer demand as our current facilities reach full utilization.

From a company-wide perspective, we believe we have ample capacity, ending the third quarter with 57% utilization in our company-controlled data centers and providing an attractive selling point for our colocation and hosting services.

During the third quarter, we added an incremental 5,000 occupied square feet in our company-controlled data centers, providing evidence of the solid demand we're experiencing for ourselves -- for our services.

The shift towards higher margin company-controlled data centers is a key driver to our long-term profitable growth.

On Slide 16, details of terms of our amended credit facility, which increased our borrowing capacity by $30 million, bringing our total bank facility to $137.25 million. The amended facility increased our revolver by $10 million to $70 million, increased our term loan by $10 million to $67.25 million and reduced the minimum required liquidity covenant from $30 million to $20 million while extending our maturity and maintaining an attractive cost of funds of LIBOR plus 350 basis points.

On Slide 17, we see highlights of our capital flexibility. We maintained substantial cash generation capability as evidenced by our discretionary cash flow defined as adjusted EBITDA less maintenance CapEx. Annualizing our third quarter EBITDA and taking the midpoint of our maintenance CapEx guidance for 2012 implies an annualized discretionary cash flow of roughly $40 million.

Given our healthy balance sheet, with the financial leverage comfortably below our peer group, and cash generation capability, we continue to maintain our capital flexibility. We feel comfortable at our current leverage and expect our capital deployment plans to be fully funded with our current debt facilities, cash generation and cash-on-hand.

Now, let me turn the call back to Eric's closing remarks before we take your questions.

J. Eric Cooney

Great. Thanks, Kevin. Now I'll briefly summarize on Slide 18. We believe our third quarter results affirm both the strategic direction we have chosen for the company, as well as demonstrate focused execution across the business. We continued to balance the solid growth we are experiencing in our core data center services with softness in our IP business. Our core data center services revenue has delivered growth at a 20% 3-year compound annual growth rate and remains the engine for top line growth.

Total revenue increased 10% year-over-year, while adjusted EBITDA increased 11% year-over-year, highlighting our tight cost controls and a solid operating leverage in our business model.

Going forward, we will continue to leverage our company-controlled data center capacity and look to fill this capacity with our portfolio of colocation hosting and cloud offerings. Further, we expect to continue to focus on operational excellence in support of continued long-term profitable growth for our shareholders.

Now, we'd like to open up the call for your questions. Operator?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Mark Kelleher from Dougherty & Company.

Mark Kelleher - Dougherty & Company LLC, Research Division

Could you talk about the IP services a little bit? We kind of expect that to decline a little bit each quarter. It seems to have gone down a little bit more. Is that an acceleration rate that we should build into our models going forward? Or was there something unusual in there and -- or what do you think the deterioration rate should be there on IP services?

J. Eric Cooney

I guess, yes to both of your question. First of all, the quarter-over-quarter sequential decline in IP revenue was really attributable to 2 things. One was -- you probably recall we have a equipment product called the FCP, Flow Control Platform, that's a hardware equipment box that we sell on an ongoing basis. Simply put Q2 to Q3, we had a reduction in those FCP equipment sales, and that somewhat lumpy hardware sales contributed in large part to the sequential decline. Having said that, we also have experienced, simply put, softer bookings in our IP services business unit over Q2 and Q3, and that also contributed somewhat to the sequential decline in IP revenue. So as you're contemplating your model for our IP services business unit going forward, it's probably reasonable to expect a, call it, modest or slight increase in whatever trends you were using for the quarterly decline in IP revenues based on my comments about the IP services' soft bookings.

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. And then going to the data center services component, when did the Atlanta and L.A. capacity come online? I guess what I'm really asking is did that help contribute any revenue in the quarter?

J. Eric Cooney

No. Both of those facilities were brought online right at the end of the third quarter, so there was no impact to 3Q revenue.

Mark Kelleher - Dougherty & Company LLC, Research Division

Should we expect a nice push going into Q4 as you now sell into those facilities?

J. Eric Cooney

For Atlanta, I would say not really, only insofar as Atlanta, you may recall, is an existing company-owned data center. We were, simply put, expanding existing -- on a footprint, so we had capacity available. Although it was filling rapidly, what we now have the capacity to sell into future growth. But that wouldn't necessarily translate to an uptick or a spike in bookings in the fourth quarter. Los Angeles though, in contrast, is in fact an entirely new market for us, at least in terms of company-controlled footprint. So to use your analogy, yes, there's reason to expect an uptick in bookings coming out of the Los Angeles market.

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. And last question is, just how much CapEx do you think you'll need to put up that New Jersey facility?

J. Eric Cooney

We'll come back in our fourth quarter results presentation as we normally do and give, let's say, explicit 2013 CapEx guidance. Having said that, what we've said thus far or historically, is we're spending something under, call it, $1,500 per net sellable square foot of CapEx for our premium data center builds. We've not yet finalized exactly how many square feet we'll -- net sellable square feet we'll bring online in the first phase of that New Jersey data center buildout. But if history is any indication, you can probably expect at the very low end, maybe 10,000 net sellable square feet, perhaps as much as 15,000 net sellable square feet. So with that information you can come with a reasonable estimate of CapEx associated with New Jersey in 2013.


Our next question comes from the line of Gray Powell from Wells Fargo.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Just had a few here. So clearly, DuPont Fabros scared investors in the space today with their commentary on pricing trends, mainly for larger super-wholesale type deals. Obviously, you guys focus on a very different segment of the market. So can you just talk about what you're seeing for retail pricing for smaller deals? And then conversely, since to some extent, you guys are a wholesale customer, I realize it's different, but are you seeing any benefit on the cost side when you're leasing new space from wholesale providers for expansion?

J. Eric Cooney

So your first question about pricing trends in retail colocation, I can simply state, we have not seen any changes in the competitive pressures or pricing pressures, really, across the retail colocation footprint. To a certain extent, also keep in mind Internap may be more isolated than that even in some of our retail colocation peers insofar as we sell, not only colocation services in our data centers, but we're also selling the hosting and the cloud services. So we get, let's say, a bit of diversification there that probably helps out our pricing pressure. But even if we focus solely on retail colocation, the answer is, no. We've not seen any changes in the market or competitive pressures to adversely impact pricing. To your second question about are we seeing any price or cost benefits associated with the DuPont Fabros announcement on market pressures in wholesale. Our answer to that would actually be, no, because for the most part, we've moved away from leasing footprint from wholesale providers. And if you take New Jersey as an example, we're leasing, yes, from a landlord who is a traditional commercial real estate provider that we engage in a long-term lease. But we then deploy the capital to turn essentially a shell into a premium data center. So I would suggest that our landlord in Secaucus, New Jersey is very different than a Digital Realty or DuPont Fabros. So no, we're not seeing any benefits. It's really unrelated to our business, if you will.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Got it. That makes perfect sense. And then, obviously, you guys saw a nice uptick in company-controlled build square footage. I'm guessing that's mainly related to what you're seeing in Dallas. Can you just talk about trends there?

J. Eric Cooney

I would actually correct you. It's, yes, in part driven by increasing momentum in fill rates in our Dallas data center. But I would suggest we're seeing nice traction in a number of our company-controlled markets, New York, Santa Clara in particular come to mind, where we continue to successfully fill up our company-controlled capacity.


Our next question comes from the line of Chris Larsen from Piper Jaffray.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Eric, if I could continue on that same line. Just the comments that DuPont Fabros indicated was that New Jersey was, again, on the wholesale side, seeing extra pressure. Anything that you've seen on the retail side as you've done your research that suggests New Jersey might be any weaker? And then, more of a strategic question, there's been a number of assets for sale. Obviously, we saw 365 Main bought some stuff from Equinix, but there's some other assets that are out there for sale. Is that anything you've considered? And how would you treat something like that? Or what are your thoughts around buying an already built facility that you could take over?

J. Eric Cooney

Sure. So with regard to New Jersey, I will say, no. We -- again, we looked at New Jersey, really in the context of the entire New York Metro market and decisions about first of all, do we want to remain in that market in terms of the supply-demand characteristics, and then obviously, also more specifically at the New Jersey market, but we looked at it with a filter or a lens as a retail colocation provider. And yes, checking all those boxes, we obviously came away comfortable with what we see, both in terms of the short and the longer-term trends for demand in that market and our ability to fill that property. Again, just keep in mind, when we look at new data center builds, we're not only contemplating filling that capacity with retail colocation, but obviously, equally happy or arguably more happy to fill that footprint with hosting and cloud infrastructure. So as long as we're comfortable that we can do that, we're comfortable we'll generate very healthy returns on the capital as we deploy in those markets. To your question about assets for sale, yes. Obviously, we're on the, probably as you'd expect, the "to-call" list when assets like that come on the market. But the -- I guess, the first thing to point out is, we're in the data center services business, simply put, because we think we can add value in terms of deploying capital, take New Jersey as a prime example. We'll deploy capital to turn a shell into a premium data center, and then we'll monetize that capital investment by selling premium colocation hosting and cloud services. That's how we generate our return on capital. We're typically not looking for, what I would characterize as, pure financial investments where I can essentially buy a stream of cash flows from an already populated data center and just exactly that, look at it as a pure financial investment akin to probably what a real estate investor would look at. That's not really our core competency and our expertise, so typically not the type of investment profile we're looking for.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

And within that same line, assuming that, that facility came on, it was half-full, is that something you would look at? Or again, you'd rather build greenfield and do it yourself?

J. Eric Cooney

Well, let's put it this way, our starting point for triggering an analysis around expansion in a given market is -- particularly at this point, is driven by success-based filling of the capacity we have in our existing North American data center markets. So I'm -- certainly today, given our utilization, we're not particularly in the market for expansion into new markets. So I'm only going to be in the near to medium term inspired to deploy more capital based on successfully filling up the capacity that I have. So again, I think that probably answers your question. We're looking for success-based expansion. And for the most part, that's probably not lining up with the assets that happen to come on the market. To the extent it did, opportunistically, if there was a 1/3 full data center that was available for the right price in the New Jersey market, rest assured we would have taken a look at that.


[Operator Instructions] Our next question comes from the line of James Dobson from Benchmark Company.

James T. Dobson - The Benchmark Company, LLC, Research Division

In regards to sort of the increase in net sellable controlled space, it looks like it increased 20,000 in the quarter, and that we've been looking for an increase closer to 27,000 with L.A. and Atlanta coming on. Was either one of those builds scaled back at all, or is it just sort of a delay in that? And then in regards to Dallas, is it reasonable to expect maybe an additional phase of that building coming online in the next few quarters?

J. Eric Cooney

With regard to scaling back, I think it's fair to say that Atlanta -- I wouldn't say it was scaled back a bit, but we still actually have several thousand square feet of Atlanta to bring online. Really, that gets down to, let's say, some logistical details associated with our relocation of the corporate headquarters, out of the 250 Williams Street building in Atlanta, and simply put, we ended up retaining some administrative offices in that expansion space, which we're still in the process of exiting so haven't actually turned it into raised tile square footage, majority of the capital dollars have been deployed to do that, so it's, let's say, the final stages of converting that to tile. So I think it's safe to say in the fourth quarter when we report those results, you'll see a further increase in net sellable square footage, and that'll be essentially tied to Atlanta. With regard to Los Angeles, I'm not -- I don't believe we reported numbers differently than what we've deployed in terms of net sellable square footage there, so I don't think there's any change from what we said externally before. And with regard to Dallas, we -- in last quarter results' Q&A, if I'm remembering correctly, we were asked a question about expansion in other markets and we indicated at that time that the Boston market and the Santa Clara market after New York, those were probably the second and third markets in which from a fill-rate capacity standpoint we would most likely next hit our upper threshold and need to do some further expansion. And at this stage, I would just reiterate, that's still the case, reasonable to expect expansion in Boston and Santa Clara, maybe towards the end of 2013, but also potentially that could slip into 2014. It really just depends on our successful rate of sale in those markets. But Dallas is not, let's say, in the top 3.

James T. Dobson - The Benchmark Company, LLC, Research Division

Okay, great. And then, regarding the occupied company-controlled space. Was any of that related to a shift from Voxel, from partner to company-controlled?

J. Eric Cooney

In the uplift from first quarter to second quarter, yes, there was some, essentially a COGS benefit as we moved Voxel out of some partner facilities and into company-controlled facilities. But in the uplift from second quarter to third quarter, no, there was no -- certainly no material Voxel footprint included in that increase in occupied square footage.

James T. Dobson - The Benchmark Company, LLC, Research Division

Okay, great. And then the final question would be, when you look at sort of colo separated from hosting, do you feel that both of those products are growing in-line with the industry in regards to sort of your colo growth and then your hosting growth?

J. Eric Cooney

So the question about how fast is the total addressable market going, we've mentioned this in a couple of different ways and candidly, this is one of the reasons we've put that slide in the deck, the pie chart slide this time. Essentially, what we're saying is that Internap's core data center services, colocation and hosting combined, has been growing at approximately a 20% compound growth rate over the past 3 years. Also true, at least based on our analysis of the size of the total addressable market, if you aggregate our colocation, hosting and cloud markets, we also believe those markets are growing actually slightly below 20%. So the longer answer to your question is, yes, we think we're growing at or slightly above the aggregate total addressable market growth rate.


And with no further questions in the queue, I'd like to turn the conference back over to Michael Nelson for any closing remarks.

Michael Nelson

Great. Thank you everyone. That concludes our call.

J. Eric Cooney

Thanks, operator. Thanks, everyone.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.

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